AUDITING AND ASSURANCE SERVICES THEORY AND PRINCIPLES A guide to understanding the requirements of Philippine Standards on Auditing (PSA) and other engagement standards by RAYMUND FRANCIS A. ESCALA, MBA Certified Public Accountant 2"4 Place, Philippine Licensure Examination for CPAs Cum Laude, BSA, University of the Cordilleras CPA Reviewer and Professor of Accountancy Managing Partner, Escala and Carandang CPAs REIN RONALD C. BERCASIO Certified Public Accountant 12" place, Philippine Licensure Examination for CPAs Summa Cum Laude, BSA, Lyceum of the Philippines - Laguna CPA Reviewer Public Practitioner 2021 Edition(st ‘v2 ‘THO) Squewesnbay jo ‘ouasaig 20U81848Y 9PIND — SSIIOUd LIGNY LNIWALVLS TWIINWNISCHAPTER 1 CHAPTER 2 CHAPTER 3 TABLE OF CONTENTS een Principles of Assurance Services 1-36 Introduction to assurance 2 Assurance engagements 3 Non-assurance engagements 14 Summary of differences between assurance and Non-assurance engagements 15 Global organizations and standard-setting boards of the accountancy profession 16 Standards governing professional services by CPAs in the Philippines 18 Adoption of Philippine standards and practice statements 19 Summary of services performed by practitioners 20 Discussion Questions 21 True or False Questions 21-22 Multiple Choice Questions 23-36 Introduction to Audit Services and Financial Statement Audit 37-68 Introduction to audit services 38 Auditing 38 Financial statements audit 42 The demand for FS audit 49 Regulator’s Requirements 51 Value of FS Audit 52 Discussion Questions 53 True or False Questions 53-55 Multiple Choice Questions 55-68 Practice and Regulation of the ‘Accountancy Profession 69-120 Introduction 70 Regulation of the Accountancy Profession 71 Scope of practice 72 Professional Regulatory Board of Accountancy (BOA) 74 Licensure Examinations for Certified Public Accountant 78 Registration 80 Practice of Accountancy 83 Penal provision 86 Continuing Professional Development i Organizations affecting the Accountancy ProfessionCHAPTER 4 Discussion Questions True or False Questions Multiple Choice Questions Overview of Audit Process and Preliminary Activities Introduction Audit Process: A General Approach Audit Process: A More Detailed Approach Preliminary Engagement Activities Acceptance of an Engagement Agreeing the Terms of Audit Engagements Acceptance of a change in engagement Discussion Questions True or False Questions Multiple Choice Questions Planning an Audit of Financial Statements Introduction Planning in audit of financial statements Major audit planning activities Identifying and assessing risk of material misstatements through understanding the entity and its environment Audit risk Establishing the overall audit strategy Developing an audit plan Direction, supervision and review Other planning considerations Discussion Questions True or False Questions Multiple Choice Questions Study and Evaluation of Internal Control Introduction to internal control Internal Control Components of Internal Control Audit procedures: Responses to Assessed risks Risk assessment procedures Further Audit Procedures Documentation Communication Discussion Questions 101 101-103 103-120 121-156 122 122 127 129 131 132 137 139 139-140 140-156 157-202 158 158 160 161 171True or F ‘alse Questions 225-227 Multiple Choice Questions 227-242 CHAPTER7 —_Transaction Cycles - Tests of Controls 244-284 Introduction 244 Understanding the transaction cycles 245 Revenue and receipt cycle 246 Expenditure and disbursement cycle 255 Human resources and payroll cycle 260 Production or conversion cycle 266 Finance and investment cycle 267 Discussion Questions 270 True or False Questions 270-271 Multiple Choice Questions 272-284 CHAPTER 8 Consideration of Fraud, Error and Non-compliance 285-325 Introduction 286 Fraud and error 286 Audit Procedures 292 Auditor is unable to continue the engagement 297 Consideration of laws and regulations 299 General Audit Procedures 302 ‘Audit procedures when non-compliance is identified or suspected 303 Reporting of noncompliance 304 Documentation 306 Discussion Questions 307 True or False Questions 307-309 Multiple Choice Questions 309-325 CHAPTER9 _Evidence and Performance of Substantive Testing 327 328 Introduction to audit evidence Sufficient appropriate evidence 329 Obtaining audit evidence 332 Audit procedures 334 Specific audit procedures : 335 Other general concepts related to audit evidence 337 Performance of substantive testing 338 Specific procedures 340 External confirmation 340 Analytical procedures : 349 Additional specific considerations for selected items a ‘Attendance at physical inventory countingCHAPTER 10 Segment information 353 Auditing accounting estimates 384 Audit procedures 356 Evaluation of results of the audit procedures 358 Written representations 358 Documentation 358 Communication 359 Discussion Questions 360 True or False Questions 360 - 361 Multiple Choice Questions 362-375 Selecting Items for Testing and Audit Sampling 377-422 Introduction 378 Selecting items for testing 378 Selecting all items (100% examination) 378 Selecting specific items (items for specific testing) 379 Audit Sampling 380 Risk involved when obtaining evidence 381 Non-sampling risk 386 ‘Summary of concepts 387 General approaches to sampling 388 Audit sampling plans 389 Attribute sampling plan 389 Other attribute sampling techniques 396 Variable sampling plan 397 Classical variable sampling (CVS) Techniques 404 Probability-proportional-to-size (PPS) sampling 406 Discussion Questions 407 True or False Questions 407-409 Multiple Choice Questions 409 -422 Completing the Audit and Audit Documentation - Completing the audit = i Search for unrecorded liabilities 425 Litigations and claims 426 Related parties 427 Going concern 430 Subsequent events 432 Final review stage analytical procedures 437 Written representations 437 Audit documentation 443 Communicating with those charged with governance 451 Omitted procedures 453CHAPTER 12 Discussion Questions = True or False Questions 455-457 Multiple Choice Questions 457-473 Audit Reporting (General - Purpose Framework) 475 Audit reporting 476 Formation of opinion 476 Expression of opinion 477 Auditor's Report 478 Supplementary information presented with financial statements 485 Communicating Key Audit Matters 486 Modifications to the opinion on the auditor's report 490 Illustrative independent auditor's report with Modifications to the opinion 494 Additional communications in the auditor’s report 499 Comparative information 500 Considerations for initial audit engagements 503 Special considerations on audits of group financial statements 505 Using the work of an auditor's expert 512 Discussion Questions 515 True or False Questions 515-517 Multiple Choice Questions 517-533 Reporting on Special-Purpose Engagements and Other Audit-Related Services 535 Introduction 536 Special-purpose engagements 536 Audit requirements and considerations 538 Auditor's Report 539 Audits of single financial statements and specific elements, accounts or items of a financial statement 541 ‘Audit of summary financial statements 547 Documents containing summary financial statements 554 Unaudited supplementary information presented 555 Reporting on other Audit-related services 555 ‘Agreed-upon Procedures (AUP) 559 Compilation of financial statements 563 Discussion Questions 565 True or False Questions 565-567 Multiple Choice Questions 568-584CHAPTER 14 CHAPTER 15 Quality Control for Audit and Assurance Firms 585 ~639 Introduction 586 Audit Quality 586 Quality Controls 588 Documentation and communication 589 Leadership responsibilities for quality within the firm 589 Ethical requirements 590 Acceptance and Continuance of Client Relationships and Specific Engagements 592 Human Resources 595 Engagement performance 598 Monitoring 605 Quality control for an audit of historical financial statements 610 Documentation 613 Discussion Questions 614 True or False Questions 614-616 Multiple Choice Questions 616 - 630 Code of Ethics for Professional Accountants 631 - 703 Introduction 632 Code of ethics 632 Code of ethics for professional accountants in the Philippines 634 Purpose of the code 635 Structure of the code 635 Effective date of the code 636 Part 1 — Complying with the Code, Fundamental Principles and Conceptual Framework 637 Part 2 — Professional Accountants in Business 643 Part 3 ~ Professional Accountants in Public Practice 652 PART 4A - Independence for audit and review engagements, which applies when performing audit or review engagements 668 PART 4B — Independence for assurance engagements other than audit and review engagements 679 Discussion Questions 684 True or False Questions 684 - 686 Multiple Choice Questions 686 - 701CHAPTER 16 Appendices Appendix A Appendix B Appendix C Auditing in an information Technology (IT) Environment 703 - 749 Introduction 704 Information Technology (IT) Environment 704 Types of IT environment 710 Controls over the IT environment 712 Auditor’s responsibilities in an IT environment 720 Test of IT Controls 721 Audit approaches in an IT environment = test of IT controls ra Auditing around the computer 722 Auditing through the computer 723 Computer as an audit tool 734 Audit approaches compared 732 Discussion Questions 733 True or False Questions 733-735 Multiple Choice Questions 735-749 The CPA Licensure Examination Syllabus and Tables of Specifications (TOS) in Auditing Illustrative Audit Planning Memorandum Fraud Risk Factors and Indications of Non-complianceChapter 1 - Fundamental Principles of Assurance Services CHAPTER 1 FUNDAMENTAL PRINCIPLES OF ASSURANCE SERVICES $$ Ac BLES OF ASSURANCE SERVICES _ Chapter Overview and Objectives: The chapter denen This chapter discusses the fundamental principles of assurance services. At the end of this chapter, readers should be able to discuss 1. The fundamental principles of assurance services 2. The assurance services a. Definition b. Objective c. Elements d. Types (as to level of assurance and as to structure) e. Common examples 3. The non-assurance services 4. The global organizations and standard-setting boards of the accountancy profession 5. The professional standards governing assurance and non-assurance engagements Relevant references: PFAE - Philippine Framework for Assurance Engagements PSA 120 - Framework of Philippine Standards on Auditing Preface - Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services — ge 1 Aim... Believe... Clai iBChapter 1 - Fundamental Principles of Assurance Services INTRODUCTION TO ASSURANCE Decision-making has been a normal part of our I decisions each and every day is made which can signi person and of every organization. ives. Countless number of ficantly affect a life of every To have a favorable outcome, decision makers heavily rely on information available which, more often than not, is prepared or provided by other persons or organizations. However, in most instances, the interests of the providers of information contradict with those of the users of the information. Thus, creating the need for an objective evaluation of the information in order to have a more reliable and dependable information. In business, reliable information becomes an essential aspect of decision-making. Decision makers gather relevant and reliable information prior to making any economic decisions that normally include the following: Users Economic decisions | Potential and Y to decide when to buy, hold or sell an equity | existing investors | investment ¥ to assess the stewardship or accountability of management ¥ to determine distributable profits and dividends (for Board of Directors — BOD) Lenders and Y to assess the security for amounts lent to the entity | other creditors | Employees Y to assess the ability of the entity to pay and provide other benefits to its employees | Government ¥ to determine taxation policies ¥ to prepare and use national income statistics | ¥ to regulate the activities of entities | *Lifted from Conceptual Framework for Financial Reporting Commonly, these users will rely on the financial information embodied in the financial statements presented and prepared by the entity where they plan to invest, grant a'loan, request salary increases’or additional benefits, or change ‘taxation policies! This situation had created the need for independent Certified Public Accountant (CPA) who is equipped with appropriate skills and knowledge to objectively evaluate the information. The CPA is expected to provide reasonable assurance as to the fairness of preparation and presentation of the financial information. Such assurance will be expressed in the form of an opinion or conclusion which will later be communicated in an assurance report. Page 2Chapter 1 — Fundamental Principles of Assurance Services What is assurance? Assurance refers to the Practitioner's satisfaction as to the reliability of an assertion being made by one party for use by another party. Simply, stated, assurance means how sure or certain the practitioner is that the representation made by a particular party is reliable. ASSURANCE ENGAGEMENTS. Definition Assurance engagement (or services) means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Assurance services are three-party contracts in which assurers report on (or improve) the quality of information. It is used to describe the broad range of information enhancement services that are provided by CPAs. These services are performed by an independent professional designed to improve the quality or enhance the credibility of the subject matter of the engagement. Objective of assurance engagement The objective of an assurance engagement is for a practitioner to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria and express a conclusion that provides the intended user with a level of assurance about that subject matter. Elements of assurance engagements Written Assurance Report Responsible Materiality Assurance Engagement Risk Cost-Benefit Constraint | Professional Skepticism Sufficient Appropriate Evidence Appropriate Subject Matter Aim... Believe... Claim. Page 3Chapter 1 - Fundamental Principles of Assurance Services As depicted on the above diagram, the following are the elements of an assurance engagement (3SECC): A. Athree-party relationship involving a practitioner, a responsible party, and intended users; An appropriate Subject matter; Suitable Criteria; Sufficient appropriate Evidence; and A written assurance report (Conclusion) in the form appropriate to a reasonable assurance engagement or a limited assurance engagement. mone A. Three-Party Relationship: An assurance engagement involves three separate parties, namely a. The practitioner * is broader than the term auditor as used in Philippine Standards on Auditing (PSAs) and Philippine Standards on Review Engagements (PSREs), which relates only to practitioners performing audit and review engagements with respect to historical financial information ® must be independent to both the responsible party and the intended users * is governed by ethical requirements (i.e. professional competence) regarding the conduct of the engagements * may use the work of persons from other professional disciplines, referred to as experts for engagements requiring specialized skills and knowledge beyond those ordinarily possessed by an individual practitioner responsible for determining the nature, timing or extent of procedures required by the engagement. So as not to be confused with the term professional accountant, practitioner and auditor, the following explains the uses of these terms. Professional | Certified Public Accountant engaged in any area of accountant _| accountancy Practitioner | CPA rendering professional services (assurance or Non-assurance) Auditor A practitioner rendering audit and review services b. The responsible party isthe person/s responsible to the subject matter, the subject matter information, or both * may or may not be the engaging party to the practitioner may or may not be from the same organization with the intended users may be one of the intended users, but should not be the ‘only one Page 4Chapter 1 — Fundamental Principles of Assurance Services Cc. The intended users * are the person/s for whom the practitioner Prepares the assurance report. The assurance report shall be addressed to all users whenever practical, * in case of broad range of interests by the readers of assurance report, intended user may be limited to major stockholders with significant and common interests, * may be identified by agreement between the practitioner and the responsible party or engaging party, or by law. Once identified, the report to be issued must be restricted only to parties identified. B. Appropriate Subject Matter Subject matter is the nature of the assertion the practitioner gathers sufficient evidence. On the other hand, subject matter information pertains to the outcome of the evaluation or measurement of the subject matter. It is for which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report The subject matter, and subject matter information, of an assurance engagement can take many forms. Table below summarizes illustration given in the Philippine Framework for Assurance Engagements. : Subject matter Form Subject matter information Financial historical or recognition, performance or | prospective financial | measurement, conditions position, financial presentation and performance and cash | disclosure represented in flows financial statements Non-financial performance of an key indicators of performance or entity efficiency and conditions effectiveness Physical capacity of a facility Specifications document characteristics Systems and an entity’s internal assertion about processes control or IT system effectiveness Behavior corporate ‘statement of compliance governance, or a statement of compliance with effectiveness regulation, human resource practices Aim... Believe... Claim... Page 5Chapter 1 — Fundamental Principles of Assurance Services 3 Furthermore, subject abies have different characteristics, including the degree to which information about them is: Y qualitative versus quantitative; Y objective versus subjective; Y historical versus prospective; and Y relates to a point in time or covers a period. Such characteristics affect the: a. Precision with which the subject matter can be evaluated or measured against criteria; and b. The persuasiveness of available evidence. The assurance report notes characteristics of particular relevance to the intended users. Characteristics of a subject matter to be considered appropriate An appropriate subject matter is: a. Identifiable, and capable of consistent evaluation or measurement against the identified criteria; and b. Such that the information about it can be subjected to procedures for gathering sufficient appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate. C. Criteria The benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for presentation and disclosure. Criteria may be a. Formal > PFRS - preparation of financial statement » Established internal control framework (e.g. COSO) or internal control objectives specifically designed for the engagement - reporting on internal controls > Applicable laws, regulations or contracts - reporting for compliance b. Less formal > Internally developed code of conduct (e.g. entity's by-laws) > Agreed level of performance (e.g, the number of times a particular committee is expected to meet in a year) c. Established > those embodied in laws or regulations, recognized bodies of experts that folloy » associated to formal criteria d. Specifically developed > those designed for the purpose of the engagement > associated to less formal criteria Aim... Believe... Claim. SS Page 6 , Or issued by authorized or W a transparent due processChapter 1 ~ Fundamental Principles of Assurance Services Suitable criteria are required for reasonably consistent evaluation or measurement of a subject matter within the context of professional judgment. Without the frame of reference Provided by suitable criteria, any conclusion is open to individual Interpretation and misunderstanding. : Suitable criteria are context-sensitive, that is, relevant to the engagement circumstances. Even for the same subject matter there can be different criteria. For example, one responsible party might select the number of customer complaints resolved to the acknowledged satisfaction of the customer for the subject matter of customer satisfaction; another responsible party might select the number of repeat purchases in the three months following the initial purchase. Characteristics of suitable criteria: (RUN CR) a. Reliability - reliable criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. b. Understandability - contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations. c. Neutrality - contribute to conclusions that are free from bias. d. Completeness - criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and disclosure. e. Relevance - relevant criteria contribute to conclusions that assist decision-making by the intended users. Communication of criteria to intended users Criteria need to be available to the intended users to allow them to understand how the subject matter has been evaluated or measured. Criteria are made available to the intended users in one or more of the following ways: a. Publicly. ; b. Through inclusion in a clear manner in the presentation of the subject matter information. cc. Through inclusion in a clear manner in the assurance report. d. By general understanding, for example the criterion for measuring time in hours and minutes. ee Aim... Believe... Claim. Page 7Chapter 1 — Fundamental Principles of Assurance Services D. Sufficient Appropriate Evidence Evidence pertains to all information gathered by the practitioner in evaluating the subject matter against criteria, on which the conclusion js based. The practitioner performs the engagement with an attitude of professiona) skepticism to obtain sufficient appropriate evidence about whether the subject matter information is free from material misstatement. Without the evidence, the practitioner will not be able to attain the objective of an assurance engagement which is formulating and expressing an opinion or conclusion. Consideration when planning and performing the engagement The following are practitioner's consideration when planning and performing the engagement (determining the nature, timing and extent of evidence- gathering procedures). Quantity of evidence (Sufficiency) Quality of evidence (Appropriateness) Materiality Assurance engagement risk Cost-benefit consideration Professional skepticism m>pangse Sufficiency vs. Appropriateness Two characteristics must be possessed by the evidence to be gathered in an assurance engagement. These are sufficiency and appropriateness. Sufficiency is the measure of the quantity of evidence. The quantity of evidence needed is affected by the Y Risk of the subject matter information being materially misstated (the greater the risk, the more evidence is likely to be required); and Y Quality of such evidence (the higher the quality, the less may be required). Appropriateness (previously called competence) is the measure of the quality of evidence; that is, its relevance and its reliability, Accordingly, the sufficiency and appropriateness of evidence are interrelated. However, merely obtaining more evidence may not compensate for its poor quality. What is sufficient and appropriate shall be determin f i led by the practitione’ using his or her professional judgment and by onal skepticism. Y exercising professt Believe... Cle Page 8Chapter 1 — Fundamental Principles of Assurance Services in terms of obtaining sufficient appropriate evidence, it is generally more difficult to obtain assurance about subject matter information covering a period than about subject matter information at a point in time. In addition, conclusions provided on processes ordinarily are limited to the period covered by the engagement; the practitioner provides no conclusion about whether the process will continue to function in the specified manner in the future. Materiality Materiality is relevant when the practitioner determines the nature, timing and extent of evidence-gathering procedures, and when assessing whether the subject matter information is free of misstatement. When considering materiality, the practitioner understands and assesses what factors might influence the decisions of the intended users. For example, when the identified criteria allow for variations in the presentation of the subject matter information, the practitioner considers how the adopted presentation might influence the decisions of the intended users. The assessment of materiality and the relative importance of quantitative and qualitative factors in a particular engagement are matters for the practitioner's judgment. Assurance engagement risk Definition ‘Assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. Managing assurance engagement risk The practitioner may reduce assurance engagement risk to a lower level by increasing the assurance level provided by the procedures performed. To be meaningful, the level of assurance obtained by the practitioner is likely to enhance the intended users’ confidence about the subject matter information to a degree that is clearly more than inconsequential.Chapter 1 - Fundamental Principles of Assurance Services Components “ In general, assurance engagement risk can be represented by the following components, although not all of these components will necessarily be Present or significant for all assurance engagements: Assurance Engagement Risk Risk of non-detection Risk of material Misstatement or detection risk 7 The risk that the practitioner The risk that the subject matter information is ‘will not detect » materien ‘materially misstated. It is composed of the following: ie Btatamnent that eke Inherent risk Control risk The susceptibility of the |] The risk that a material subject matter misstatement that could mation to a material occur will not OS ad misstatement, assuming || _ Prevented, or dete ly thar and corrected, on atime! at there are no rajoted || basis by related intaral controls controls The degree to which the practitioner considers each of these components is affected by the engagement circumstances, in particular by the nature of the subject matter and whether a reasonable assurance or a limited assurance engagement is being performed. Materiality and assurance engagement risk (audit risk) will be discussed in detail in Chapter 5. Cost-benefit Consideration In performing evidence-gathering procedures, the Practitioner is expected to observe cost-benefit consideration. This means that “the benefits that will be derived from obtaining the evidence should exceed the cost of obtaining it’. The practitioner considers the relationship between the cost of obtaining evidence and the usefulness of the information obtained, However, the ‘matter of difficulty or expense involved is not a valid basis for omitting an evidence gathering procedures for which there is no alternative. To simplify, in case there is a significant evide must be performed but it involves high cost practitioner may: 1. Identify and perform alternative associated cost or level of difficulty, ‘nce-gathering procedure that or high level of difficulty, the Procedures that can minimize theChapter 1 - Fundamental Principles of Assurance Services 2. Inthe absence of alternative procedures, the practitioner is still required to perform the procedures as long as he/she believes that performance of it is necessary and beneficial to the entire engagement. Professional Skepticism The practitioner plans and performs an assurance engagement with an attitude of professional skepticism recognizing that circumstances may exist. that cause the subject matter information to be materially misstated. This means the practitioner makes a critical assessment, with a questioning mind, of the validity of evidence obtained and is alert to evidence that contradicts or brings into question the reliability of documents or representations by the responsible party. Simply stated, professional skepticism dictates that whenever the practitioner gathers information, he/she considers the possibility that the information received might contain misstatement. To exhibit professional skepticism, the practitioner will then validate the information received by performing additional procedures. Accordingly, the more the practitioner intends to exhibit the attitude of professional skepticism, the more procedures will be required. The following are examples of exhibiting professional skepticism 1. An attitude of professional skepticism is necessary throughout the engagement process for the practitioner to reduce the risk of overlooking suspicious circumstances, of over generalizing when drawing conclusions from observations, and of using faulty assumptions in determining the nature, timing and extent of evidence gathering procedures and evaluating the results thereof. 2. An assurance engagement rarely involves the authentication of documentation, nor is the practitioner trained as or expected to be an expert in such authentication. However, the practitioner considers the reliability of the information to be used as evidence, for example photocopies, facsimiles, filmed, digitized or other electronic documents, including consideration of controls over their preparation and maintenance where relevant. 3. When receiving contradicting information from different sources, the practitioner ordinarily performs procedures to identity the possible causes of the discrepancies (e.g. bank reconciliation, subsidiary and general ledgers reconciliation, and inquiries with parties involved to account for the differences). eS . Believe... Claim. Page 11Chapter 1 - Fundamental Principles of Assurance Services However, in the event that the practitioner had already exhausted ay Possible means to identify for the differences but still there are items unaccounted, the following generalizations about reliability of evidence may be useful, a, External vs. internal source . Evidence is more reliable when it is obtained from independent sources outside the entity. b. Effective internal control Evidence that is generated internally is more reliable when the related controls are effective. c. Directly vs. indirectly obtained by the practitioner Evidence obtained directly by the practitioner (for example, observation of the application of a control) is more reliable than evidence obtained indirectly or by inference (for example, inquiry about the application of a control). d. Written vs. oral representations Evidence is more reliable when it exists in documentary form, whether paper, electronic, or other media (for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of what was discussed). . Original vs. reproduced copies Evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles. E. Written Assurance Report The practitioner provides a written report containing a conclusion or an opinion that conveys the assurance obtained about the subject matter information. In addition, the practitioner considers other reporting responsibilities, including communicating with those charged with governance. The opinion to be expressed by the Practitioner may include either of the following: Types of Opinion Type Common phrase used 1._Unmodified/Unqualified | Present fairly, in all material respect 2._ Qualified Except for 3, Adverse Do not present fairly, i i — - 'y, in all material respect 4, Disclaimer of opinion We do not express a conclusion : Levels and forms of assurance The levels (high or moderate) and form, provided by the practitioner is dep engagement being rendered, (Positive or negative) of assurance endent on the type of assurance Believe... Claim. Page 12Chapter 1 ~ Fundamental Principles of Assurance Services The following are types of assurance engagement as to level of assurance provided: 1 Reasonable assurance engagement - the objective is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner's conclusion. Such form conveys “reasonable assurance”. Example of expressing an opinion in reasonable assurance engagement: ‘In our opinion internal control is effective, in all material respects, based on XYZ criteria.” Limited assurance engagement - the objective is a reduction in assurance engagement risk to a level that is acceptable in circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement, as a basis for a negative form of expression of the practitioner's conclusion. This form conveys “limited assurance”. Example of expressing an opinion in limited assurance engagement: “Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria.” Reasonable vs. Limited Assurance Engagement Reasonable Limited Level of Reasonable or High, but not | Limited or assurance absolute Moderate provided Form Positive Negative Example ‘Audit Review Procedures ¥ Inquiry ¥ Inquiry performed Y¥ Observation v Analytical ¥ Inspection procedures Y Analytical procedures Y Confirmation v Reperformance ¥_ Recalculation Moreover, the following are types of assurance engagement as to structure: rd Aim... Believe... Claim... Page 13Chapter 1 — Fundamental Principles of Assurance Services Assurance Engagements as to structure : The following are the assurance engagements according to structure, A. Attestation engagements Attestation engagement is an engagement in which a practitioner j engaged to issue, or does issue, a written communication that expresse. ‘a conclusion about the reliability of a written assertion that js the responsibility of another party. Common types of attestation engagements are: i" : a. Audit engagement is an engagement in which the auditor provides a reasonable (but not absolute) level of assurance that the Subject matter is free from material misstatements. b. Review engagement is an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement. B. Direct engagements Direct engagement is a residual definition of assurance engagement as to structure. Furthermore, assurance engagements may be classified further depending on the availability or non-availability of the assertions to the intended users. This classification will include the following: 1. Assertion-based engagements are assurance engagements that the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users. This is commonly used for attestation engagements. 2. Direct reporting engagements are assurance engagements that the practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users in the assurance reports. This is commonly used for direct engagements. NON-ASSURANCE ENGAGEMENTS Non-assurance engagements lack one or more of the elements of assurance engagements. Common examples include: A. Agreed-upon procedures auditor is engaged to carry out those procedures of an audit nature ©? which the auditor and the entity and any appropriate third parties Nav agreed and to report the factual findings Aim... Believe... Clai page 14 )Chapter 1 ~ Fundamental Principles of Assurance Services ¥ recipients of the report must form their own conclusions from the report by the auditor. Y report is restricted to those parties who have agreed to the procedures to be performed B. Compilation of financial and other information v accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information ¥ ordinarily entails detailed data to a manageable and understandable form ¥ accountant will not express any assurance on the financial information v intended users derived some benefits as a result of the accountant’s involvement C. Some tax services where no conclusion is expressed, and tax consulting Y Practitioner provides advice on income tax and business strategies Y Develop tax strategies to minimize businesses’ tax liability and worries D. Management consulting and other advisory services Y Practitioner provides advice or recommendations for the improvement of client’s use of its capabilities and resources to achieve the objective the client’s organization Needless to say, non-assurance engagements provide no assurance to intended users. SUMMARY OF DIFFERENCES BETWEEN ASSURANCE AND NON-ASSURANCE ENGAGEMENT Assurance engagement Non-assurance engagement Designed to improve the quality or enhance credibility of the subject matter ¥ Designed to provide comments, suggestions or recommendations on how to use the information ¥ Should be provided by independent professional ¥ Independence is not required ¥ Common examples include a. Audit; b.review; and c. examination of prospective financial information ¥ Common examples include a. agreed-upon procedures; b.compilation; c. preparation of tax returns; and d.management advisory services |_¥ Three-party contract ¥ Two-party contract ¥ Output: assurance in the form of to use the information V Output: recommendation on how an opinion Aim... Believe... Claim. Page 15of Assurance Services re the examples of Chapter 1 - Fundamental Principles Presented on the diagram below a1 non-assurance engagements. common assurance ang Non-assurance Assurance Compilation Agreed-upon Bookkeeping procedures Attestation Other services © Audit © Performance e Review review Management Tax services where © Other Examination ‘addsory no conclusion ic attestation —_of forecasts expressed services GLOBAL ORGANIZATIONS AND STANDARD-SETTING BOARDS OF THE ACCOUNTANCY PROFESSION The international Federation of Accountants (IFAC) is the global organization for the accountancy profession. The organization was founded in 1977 and is comprised of more than 175 member and associate organizations in 130 countries and jurisdictions, representing nearly 3 million professional accountants. It supports the development, adoption, and implementation of high-quality international standards’, To pursue its purpose, it supports four independent standard setting boards namely: 1. International Auditing and Assurance Standards Board (IAASB)* 2. International Accounting Education Standards Board (IAESB)™? 3. International Ethics Standards Board for Accountants (IESBA) * 4. International Public Sector Accounting Standards Board (IPSASB) ° Presented on the next page is a diagram of the structure of these organizations and their respective roles and pronouncements, * Source: https: //www. 2 1AESB ceased operation in 2019, Accountancy edu the new approach at the global level. Source: hity ation will be taken forward by IFAC as part f Aim... Believe... 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BelievChapter 1 — Fundamental Principles of Assurance Services STANDARDS GOVERNING u PROFESSIONAL SERVICES BY —Cpag IN THE PHILIPPINES i Below table lists the different professional standards containing basic Principles and essential procedures (together with related guidance in the form of explanatory and other material, including appendices), which are used by Cpas as guidelines in rendering professional services. All these standards are issued by the Auditing and Assurance Standards Council (AASC; formerly known as Auditing Standards and Practices Council - ASPC). At present, AASC pronouncements are mainly adopted from the standards and Practice statements issued by the IAASB. Country-specific standards and practice statements are developed to address specific auditing issues not covered by the 1AASB pronouncements. Standards Related Practice | Application of Standards Statements Philippine Standards on | Philippine Auditing | Audit of historical financial Auditing (PSAs) Practice Statements | information (PAPSs) Philippine Standards on | Philippine Review —_| Review of historical Review Engagements _| Engagement financial information (PSREs) Practice Statements (PREPSs) Philippine Standards on | Philippine Assurance | Assurance engagements Assurance Engagement dealing with subject matter Engagements (PSAEs) Practice Statements | other than historical (PAEPSs) financial information Philippine Standards on | Philippine Related | Agreed-upon procedures Related Services Services Practice information and other (PSRSs) Statements (PREPSs) | related services engagements as specified by AASC Philippine Standards on All services falling under Quality Control (PSQCs) the ASCs Engagement Standards IMPORTANT NOTES: a. PSAs, PSREs, PSAEs and PSRSs are known as e: b. These standards require professional professional judgment in applying them, c. Practice Statements are issued to provide interpretive guidance and practical assistance to professional accountants in im lementing the related engagement standards and to promote good practice d. A professional accountant shall be aw; ic fare and i able practice statements to the engagement. Sores the appt ngagement standards. accountants to exercise Believe... Claim.Chapter 1 — Fundamental Principles of Assurance Services In exceptional circumstances, a professional accountant may judge it necessary to depart from a basic principle or essential procedure of an engagement standard to achieve more effectively the objective of the engagement. When such a situation arises, the professional accountant should be prepared to justify the departure. ADOPTION OF PHILIPPINE STANDARDS AND PRACTICE STATEMENTS Approach The AASC undertake a review of existing International pronouncements and those that may be issued in the future to make them Philippine-specific. Changes to International pronouncement to make them Philippine-specific are made clear in the AASC exposure draft and final Philippine Standards or Practice Statements. Working Procedure Below diagram illustrates the working procedures of AASC when adopting international pronouncements. wana [drafts trevew on deslonoted |theproposed . Philippine Standard lorPractice the AASC* en banc. *Majority of the council should approve before exposure mO}r ‘Exposed"® to the Public The draft shall also be published in the PICPA Accounting Times and ACPAPP Bulletin to give it further exposure. Exposure period: ‘Generally not shorter than 90 days for each exposure draft || to be considered by the organizations ‘and persons to whom Iti sent for ‘comment. Each final Philippine Standards and Practice Statements, ‘as well as interpretations, if deemed appropriate, shall be submitted to the PRC through BOA. Publication to Official Gozette: After which the pronouncement shall be published in the official gazette and ‘becomes operative from the effective date stated therein. **interpretations, if issued by the ASC, need not be exposed for comment ***requires approval of at least ten (10) AASC members ——— res Aim... Believe... Claim... Page 19ance Services Chapter 1 - Fundamental Principles of Assur ACTITIONERS SUMMARY OF SERVICES PERFORMED BY PRI ve engagements Non-assurance eng ements] ‘Audit Review | Agreed-upon | Compilation (eg. audit of | (eg. aa of | procedures | engagement FS) Fs) References | PSAs = PApS | PSREs and PSRSs and PSRSs and PREPS PRSPS PRSPS Objective | Express an Express a Perform Use opinion conclusion procedures accounting whether the | whether as agreed expertise to FSare material upon with collect, prepared in modifications | the client and classify and accordance _| are to be third parties | summarize with PFRS made to the FS | and report on | FS to conform factual with PFRS findings Ethical Independence | Independence | Fundamental | Fundamental requirement | plus plus ethical ethical fundamental | fundamental _| principles principles ethical ethical principles principles Level of High but not | Moderate No assurance | No assurance assurance | absolute (limited) (reasonable) Procedures | Exclusively by | Exclusively by | Agreed-upon | May or may are the auditor | the auditor _—_| by parties not be ooo agreed by parties Report Independent Review Report | Report on Compilation provided | Auditor's (negative Factual Report which Report assurance on | Findings of identifies the (positive assertions) Procedures | information assurance on eeenalled assertions) Availablity Toallusers | Toall users Forlimited | To all users Feport use only |Chapter 1 ~ Fundamental Principles of Assurance Services CHAPTER 1: SELF-TEST EXERCISES DISCUSSION QUESTIONS 1. Define assurance. 2. Define assurance engagements and Provide its objective. 3. Enumerate and explain the different elements of assurance engagements, 4, Discuss the concepts of materiality, assurance engagement risk, cost-benefit consideration and professional skepticism. 5. Explain the rules on generalization of reliability of information. 6. Classify assurance engagements as to level of assurance provided and as to structure. 7. Identify and describe briefly the different common examples of assurance and non-assurance engagements. 8. Differentiate assurance and non-assurance engagements. 1-1 TRUE OR FALSE 1, Assurance services help enhance the reliability of financial information throughout the capital markets. 2. Assurance refers to the practitioner’s contentment that the information made by an entity is reliable. 3. Assurance services refer to engagements in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the practitioner about the outcome of evaluation of a subject matter. 4. The practitioner must be independent to the responsible party and to the public. 5. The responsible party may not be from the same organization with the intended users but may be one of the intended users. 6. The intended users must have at least one responsible party to constitute as an assurance engagement. 7. Subject matter information relates to the nature of assertion with which the practitioner gathers sufficient evidence. 8. A subject matter is considered appropriate if it can be subjected to audit procedures on a test basis. 9. The criteria serve as the yardstick to measure or evaluate the subject matter. 10. The criteria used to evaluate a subject matter must be included in any document that contains the assurance report issued on such subject matter. Aim... Believe... Claim... Page 21ices Chapter 1 — Fundamental Principles of Assurance Serv! 1-2 TRUE OR FALSE ‘ 1. Sufficiency and appropriateness of evidence are interrelated factors and, ag such, are considered complements. ccise which is a vita, i tical exert 2. The determination of materiality is a mathemat process in planning the nature, timing and extent of assurance engagement procedures. 3. Inherent risk refers to the susceptibility of the subject matter information to misstatements before consideration of controls. 4. Apractitioner may consider a procedure not applicable if it would entail high level of costs to the assurance service. The more the practitioner intends to exhibit the attitude of professional skepticism, the more engagement procedures will be required. 6. A practitioner is not expected to be an expert in the verification of authenticity of documentation of audit evidences. 7. Generally, evidence that is generated internally is more reliable than those from independent sources when the related controls are effective. 8. Only limited procedures are performed by the practitioner on limited assurance engagements as a basis for a negative form of conclusion. 9. Audits and reviews are assurance-based engagements as both the subject matter information and the practitioner’s assurance report are available to the intended users. 10. The three-party relationship still exists in non-assurance engagements which includes the practitioner, the responsible party and the public. 11. IAASB sets high-quality international standards for assurance engagements and enhances quality control that promote public confidence to the accountancy profession. 12. Engagement standards are issued to provide interpretative guidance and practical assistance to professional accountants that Promote good practice in performing assurance engagements, 13. The report issued on non-assurance engagements must be expressed in @ negative form. 14. Procedures to be done in performing audit: i Ss determined by the auditor, and reviews are exclusivelY 15. Only a moderate level of assurance is provided ; Provided isot services. in management advisory Believe... Claim. Page 22Chapter 1 ~ Fundamental Principles of Assurance Services 1-3 MULTIPLE CHOICE QUESTIONS 1. Assurance engagement A. Is an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. B. Is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. C. Is an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement. D. Is an engagement intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the information will meet the needs of an intended user. Assurance services can be best described as ‘A. Engagement designed to enable an independent practitioner to express an opinion as to the fairness of historical financial information. B. Processes that measures and communicates financial data to intended users. C._ Independent professional services intended to enhance the credibility of information to meet the needs of an intended user. D. Is broader than attestation but lesser in scope than audit. Assurance engagement include the following, except ‘A. An engagement conducted to provide a high level of assurance that the subject matter conforms in all material respects with identified suitable criteria. B. An engagement conducted to provide a moderate level of assurance that the subject matter is plausible in the circumstances. . An engagement in accordance with the Philippine Standard on ‘Assurance Engagement(s) issued by the Auditing and Assurance Standard Council as approved by the Board of Accountancy/Professional Regulation Commission. D. An engagement to perform agreed-upon procedures. The three types of attestation services are: A. Audits, review, and compilations B. Audits, compilations, and other attestation services C. Reviews, compilations, and other attestation services D. Audits, reviews, and other attestation services Believe... Claim... Page 23S Chapter 1 — Fundamental Principles of Assurance Service 5. 10. ai. 12. Which of the following is not an assurance engagement? A. Audit of prospective financial statements B. Review of interim historical financial statements C. Comprehensive audit D. Preparation of tax returns that use estimates The single feature that most clearly distinguishes auditing, attestation, ang assurance is A. Type of service B. Scope of services C. CPA's approach to the service D. Training required to perform the service Unlike consulting services, assurance services: A. Make recommendations to management B. Report on how to use information C. Report on quality information D. Are two-party contracts All, except one, are elements of an assurance engagement. A. Subject matter C. Sufficient appropriate evidence B. Written report D. Independence In a financial statement audit, which is not an element of assurance engagement? A. Independent auditor, audit client Management, audit client shareholders and/or directors B. Philippine Standards on Auditing C. Independent auditor's report D. Financial statements and the assertions Which of the following is not included in the three-party relationship in an assurance engagement? A. Auditor C. Responsible party B. Practitioner D. Intended users Which of the following is not a suitable criterion in the context of audit? A. PSA C. GAAP D. PERS for SME Characteristics of suitable criteria do not include G Comparability D. Understandability B. IFRS A. Relevance B. NeutralityChapter 1 — Fundamental Principles of Assurance Services 13. One of the elements of an assurance engagement is appropriate subject matter. For the subject matter to be considered appropriate, it |. Should be identifiable, and capable of consistent evaluation or measurement against the identified criteria. Il, Can be subjected to procedures for gathering sufficient appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate A. lonly C. Both | and I B. lonly D. Neither | nor I! 14. “Subject matter information” as used in the Framework to Assurance Engagement shall mean ‘A. The subject which is to be measured against suitable criteria. B. Outcome of the evaluation or measurement of a subject matter. C. The assertion of the responsible party. D. Any data relating to the subject matter to be measured against the criteria. 15. Which of the following can be subject matter? A. Financial and non-financial performance or condition B. Behavior C. Physical characteristics (e.g. capacity) D. All of the above can be subject matter 1-4 MULTIPLE CHOICE QUESTIONS 1. Criteria that are embodied in laws or regulations or issued by authorized bodies of expert are called A. Legal criteria C Established criteria B. Suitable criteria D. Specifically-developed criteria 2. The measure of the quality of evidence A. Appropriateness C. Relevance B. Sufficiency D. Reliability 3. The measure of the quantity of evidence A. Appropriateness C. Relevance B. Sufficiency D. Reliability 4. It refers to the level of auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party. A. Confidence level C. Reliability level B. Assurance level D. Tolerable level 5. Which of the following is not a component of engagement risk? A. Control risk C. Business risk B. Inherent risk D. Detection risk Page 25 Aim... Believe... Claim...ices Chapter 1 - Fundamental Principles of Assurance Serv! it are 6. The form of conclusion in an assurance See aw, Heh media ba 5 Reasonable and limited B. High, medium; low i an assurance engagement are C. High and low = D. Reasonable and limited 7. The two levels of conclusion in A. Positive and negative B. High, medium; low 8 These refers to assurance engagements in which the evaluation o, measurement of the subject matter is performed by - responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users, A. Assertion-based engagement B. Direct reporting engagement C. Indirect reporting engagement D. Reasonable assurance engagement 9. These refers to assurance engagements in which the practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users in the assurance reports. A. Assertion-based engagement B. Direct reporting engagement C. Indirect reporting engagement D. Reasonable assurance engagement 10. Agreed-upon procedures engagement provides what level of assurance? A. None C. High B. Absolute D. Moderate 11. Practitioners who perform assurance engagements is governed by the following, except A. The Framework to Assurance Engagements B. Code of ethics for Professional Accountants in the Philippines C. Philippine Standards on Quality Control D. Philippine Financial Reporting Standards 12. An engagement conducted to provide: (a) a high level of assurance that the subject matter conforms in all material respects with identified suitable criteria; or (b) a moderate level of assurance that the subject matter is plausible in the circumstances. A. Audit engagement B. Review engagement C. Reasonable assurance D. Assurance engagementChapter 1 — Fundamental Principles of Assurance Services 13. Assurance service engagements: A. Do not require independence 8. Require application of all attestation standards and GAAS C. Are performed currently without professional standards D. Do not require evidence 14. Which of the following may be under the scope of the Framework for Assurance Engagement? A. Agreed-upon procedures engagements and compilation of financial and other information. | B. Preparation of tax returns where no conclusion conveying assurance is expressed. C. Consulting (or advisory) engagements, such as management and tax consulting. D. Preparation of tax returns where a conclusion conveying assurance is expressed. | 15. Which of the following is incorrect regarding the "three-party relationship" element of assurance engagements? A. Professional accountants are those persons who are members of an IFAC member body, which should be in public practice. B. The responsible party and the intended user will often be from separate organizations but need not be. C. The responsible party is the person or persons, either as individuals or representatives of an entity, responsible for the subject matter. D. The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose. 1-5 MULTIPLE CHOICE QUESTIONS 1. Which of the following is incorrect regarding the practitioner? A. The term practitioner is broader than the term auditor. B. The practitioner is governed by ethical requirements (i.e. professional competence) regarding the conduct of the engagements. ; C. The practitioner must be independent to the responsible party but not necessarily to the intended users. D. The practitioner is responsible for determining the nature, timing or extent of procedures required by the engagement. Aim... Believe... Claim... Page 27eS Chapter 1 — Fundamental Principles of Assurance Servic 2. Which is incorrect regarding the resp A ¢. dD. onsible party? The responsible party and the intended party should not be from the The responsible party may be one of the intended users and may o, may not be the engaging party 3 The responsible party ordinarily provides the practitioner with written representation ; , The Pesperaith party may be responsible for the subject matter information and may also be responsible for the subject matter 3. The following relates to intended users, choose the exception: A. Intended users are the person/s for whom the practitioner prepares the assurance report Intended users may be identified by agreement between the practitioner and the responsible party or engaging party, or by law Intended users may include either the practitioner or the responsible party. In case of broad range of interests by the readers of assurance report, intended user may be limited to major stockholders with significant and common interests. 4. The Framework of Philippine Standards on Auditing provides that financial statements needed to be prepared in accordance with ‘one, ora combination of the following, except: A B. Cc 5. The following cannot be a suitable cri engagement, except? A. B. s oO. 6. According to the framework for Accounting standards generally accepted in the Philippines Philippine Accounting Standards. Another authoritative and comprehensive financial reporting framework designed for use in financial reporting and is identified in the financial statements. Accounting standards developed by the accountant of the business enterprise herself/ himself terion for an assurance Practitioner's own expectations Practitioner's judgment Practitioner's experience Agreement between the responsible party and the intended users assurance enga, t be Sufficient and appropriate eAeeeent, the criteria mus Sufficient or appropriate Suitable and available to j intended user; Suitable or available to int . tended usersChapter 1 — Fundamental Principles of Assurance Services 7. The following factors could affect the quantity and quality of available evidence that are attributable to the circumstance of the engagement. Which is the exception? A. The fact that the subject matter information is prospective. B. The timing of the practitioner’s appointment. C. An entity’s document retention policy. D. Restriction imposed by the responsible party. 8. Which is incorrect concerning evidence? A. The higher the risk of material misstatement is involved; the more is required. B. The better the quality, the less is required. C._ The volume of evidence can compensate for its poor quality. D. The reliability of evidence is influenced by its source and its nature. 9, Select the incorrect statement from the following generalization on the reliability of evidence. A. Evidence is more reliable when it is obtained from independent sources outside the entity. B. Evidence that is generated internally is more reliable when the related controls are effective. C. Evidence obtained directly by the practitioner is more reliable than when obtained indirectly, even if the source is not competent. D. Evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles. 10. Which is incorrect? A. Consistent evidence obtained from various sources or of different nature is more reliable B._Itis generally more difficult to obtain assurance about subject matter information at a point in time than about subject matter information covering a period of time. C. When it is cost prohibitive or difficult to obtain an evidence, the auditor may shift to obtain from other alternatives. D. The practitioner considers the relationship between cost of obtaining the evidence and the usefulness of the information. 11. Which is correct concerning the concept of professional skepticism A. An assumption that the responsible party is dishonest B. A critical assessment, with a questioning mind on the validity of evidence obtained C. An assumption that responsible party is trustworthy D. Disregarding contradicting information against several of consistent evidence —_—$—$—$—$—_—$<—_$_—<———— ——_—Sam—m—" Eww Aim... Believe... Claim... Page 29ssurance Services Chapter 1 — Fundamental Principles of A: sie regarding the consideration . 12. Which of the following statements materiality? A. It is taken into quantitative factors B. It is a matter of professional judgment C. It requires understanding and aoe i influence the decision of the intended user: D. It is defined as a certain percentage (e-8-, 5% of total asset, 1% of gross sales) 13. When the professional accountant has obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria, he/she can provide A. Moderate level of assurance —_C. Absolute assurance B. High level of assurance D. No assurance consideration in the context of both qualitative ang nt of the factors that might 14. Which of the fundamental principles in the Code of Ethics are required in the performance of non-assurance engagements? |. Professional competence and due care ll. Independence I. Confidentiality A. land tony C.lland Ill only B. Landill only D.1, Wand Ill 15. In an agreed-upon engagement, which of the following statements is incorrect? A. Management, the auditor and any appropriate third-party user agree on the procedures to be performed. B. Although procedures required are of an audit nature, independence is not required. C. No assurance is rendered in the report. D. The report is provided to a wide range of users for decision making. 1-6 MULTIPLE CHOICE QUESTIONS. 1. Evidence is more reliable when it is obtained from A. Internal sources within the entity B, Independent sources outside of the entity C. Internal sources outside of the entity D. Independent sources inside the entity 2. Which of the followin, it dene 1g Primarily refers to the relevance and reliability of A. Sufficiency B. Adequacy C. Appropriateness D. Suitability Believe... Claim. Page 30Chapter 1 — Fundamental Principles of Assurance Services 3. A professional accountant is required to be independent in which of the following engagements? |. Audit of historical financial information Il. Review of historical financial information Il Agreed-Upon Procedures A. only C. land Ill only B. land Il only D.1, Il, and Ill 4. Which of the following statements is/are correct? |. Audit is an assurance engagement while review is not. ll. More procedures are performed by a practitioner in a review than in an audit A. lonly C. Both | and II B. Ilonly D. Neither I nor Il 5. Which of the following is true about assurance services? A. Allassurance services are financial statement audits B. Anassurance engagement must have five fundamental elements C. A fundamental element for an assurance engagement is engagement fee D. A review of historical financial statements is not an assurance service 6. Which of the following statements is/are correct? |. Responsible parties and intended users may be from the same entity. Il. Responsible parties and intended users may be from the different entities. A. lonly C. Both | and Il B. llonly D. Neither | nor Il 7. The __ is the outcome of the evaluation or measurement of a(an)_. ‘A. Subject matter; subject matter information B. Subject matter information; subject matter C. Subject matter; evidence D. Evidence; subject matter 8. Classify the following subject matter: Internal controls Facility capacity Physical characteristics, systems and processes Systems and processes, physical characteristics Behavior, physical characteristics Physical characteristics, behavior pOP P= Aim... Believe... Claim... Page 31Chapter 1 — Fundamental Principles of Assurance Services i is ct? 9. Which of the following statements is/are corre’ |. Reliability of evidence is influence by its source and nature II. Generalizations about reliability of evidence can be made without exceptions A. lonly C. Both | and I B. llonly D. Neither I nor Il 10. Which of the following types of evidence is most reliable? A. Original copy of the Omnibus Loan and Credit Agreement B. Photocopy of the Omnibus Loan and Credit Agreement C. Scanned copy of the Omnibus Loan and Credit Agreement D. Faxed copy of the Omnibus Loan and Credit Agreement 11. is obtained from consistent evidence from different sources or of a different nature than from items or evidence considered individually. A. More assurance C. No assurance B. Less assurance D. Little assurance a. R Which of the following is an example of a formal criterion(a)? |. Philippine Public Sector Accounting Standards ll. Number of times a committee meets in a year A. lonly C. Both | and Il B. llonly D. Neither I nor II 13. Which refers to reliability of criteria? A. Contribute to conclusions that assist decision making by users 8. Allow reasonably consistent evaluation or measurement of ‘subject matter C. Contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations D. Contribute to conclusions that are free from bias 14. Which is true about assurance engagement risk? A. It is more specific than audit risk, since it encompasses audits, reviews and compilation. 4 B. It is wider in scope than audit risk, since it encompasses audits, reviews and other assurance engagements, C._ Itis more specific than audit risk, si and other assurance engagement. D. It is wider in scope than audit rist and compilations, ince it encompasses audits, reviews k, since it encompasses audits, reviewsChapter 1 — Fundamental Principles of Assurance Services 15. Evaluate the following statement as to (1) level of assurance and (2) form of i- 1. 4. % Aim... Believe... Claim... conclusion: “In our opinion internal control is effective, in all material respects, based ‘on the COSO Framework.” A. (1) Positive; (2) Reasonable C. (1) Negative; (2) Limited B. (1) Reasonable; (2) Positive D, (1) Absolute; (2) Positive 7 MULTIPLE CHOICE QUESTIONS Which of the following statements is/are incorrect? |, Financial statements audit are assurance services Ul, Review of historical financial statements are assurance services A. tonly C. Both | and I! B. lWonly D. Neither | nor It Which of the following is a distinguishing characteristic of attest engagements over direct reporting engagements? A. Assertions C. Written report B, Assurance D. Independence of the practitioner Who is responsible for determining the nature, timing, extents of assurance procedures? A. Practitioner B. Practitioner and Responsible Party C. Practitioner and Intended User D. Practitioner, Responsible Party, and Intended User Which of the following statements is/are correct? |. Whenever practical, the assurance report is addressed to all the intended users Il. In certain cases, intended users may be limited to major stakeholders with significant and common interests. A. lonly C. Both | and II B. llonly D. Neither I nor Il Which of the following statements best describes the logical relationship among audits, attest engagements, and assurance engagements? A. Allattest engagements are audits, but not all audits involve attestation. B. Allassurance engagements, including review, involve attestation. C. An audit provides assurance, but does not involve attestation. D. All audits are attest engagements, but not all attest engagements are audit. Page 33,vices Chapter 1 - Fundamental Principles of assurence 6. Which ofthe following statements s incorrect? | a og A. Intended users refer to the person, persons &F S for whom the practitioner prepares the assura! 1 persons who in a di B. Responsible party pertains to the person © Best wate: oF et reporting engagement, is responsible for the subj fer; OF in an assertion-based engagement, is responsible for ible onthe an information (the assertion), and may be respons! © subject matter, ks used to evaluate or measure the C. Criteria represent the benchmar! t! subject matter, including where relevant, benchmarks for presentation and disclosure. D. Assertions pertain t h evaluating the subject matter against criteria, based: 7. Which of the following procedures ordinarily performed during an audit are also performed in a review engagement? ‘A. Assessment of accounting and internal controls B. Tests of controls C.. Tests of records and responses to inquiries D._ Inquiry and analytical procedures 8. Assurance engagements may be classified according to (1) level of assurance being provided and (2) structure of the assurance engagement. Classify the following assurance engagements as to either (1) as to level of assurance or (2) as to structure. 1. Reasonable assurance engagement Il. Limited assurance engagement ‘0 All information gathered by the practitioner in on which the conclusion is Ill. Attestation engagement IV. Direct reporting engagement A. and Ill; (2) and IV C. Ill and IV; (2) land I B. fand Il; (2) Ill and IV D. land IV; (2) Land Il 9. These are representations by management, explicit or otherwise, that are embodied in the financial statements. A. Assertions C. Evidence B. Criteria D. PSAs 10. It refers to the risk that a practitioner would express an inappropriate conclusion when the subject matter information is materially misstated. A. Information risk C. Risk i - Risk of mat i t B. Assurance engagement risk D. Audie is, terial misstatement Page 34Chapter 1 - Fundamental Principles of Assurance Services 11. Which of the following is an example of an assurance engagement providing limited assurance? ‘A. Anengagement to express an opinion whether the financial statements are prepared in all material respects, in accordance with an identified financial reporting framework B. Anengagement, to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared in all material respects, in accordance with an identified financial reporting framework. C. An engagement to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. D. An engagement to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information. 12. The practitioner's independence is not required in which of the following engagements? A. Audit of historical financial statements B. Review of historical financial statements C. Examination of prospective financial statements D. Installation of accounting information systems 13. An engagement is classified as a limited assurance engagement if: A. The objective is a reduction in assurance engagement risk to an acceptably low level as the basis for a positive form of expression of the practitioner’s conclusion. B. The objective is a reduction in assurance engagement tisk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner's conclusion. C. The evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of assertion by the responsible party that is made available to the intended users. D. The practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users. The subject matter information is Provided to the intended users in the assurance report. Aim... Believe. Claim... tage ssChapter 1 — Fundamental Principles of Assurance Services 14. Which of the following Is most likely a form of conclusion for a Feasonable assurance engagement? A. "In our opinion, internal control is & based on XYZ criteria.” B. "Based on our work described in this report, attention that causes us to believe that Interna in all material respects, based on XYZ criteria. C. Both A andB. D. Neither Anor B. fective, in all material Tespects nothing has come to our | control is not effective 15. Which of the following engagements is not covered by the pronouncement, of AASC (Auditing and Assurance Standards Council)? A. Audit and review engagements B. Agreed-upon procedures engagements C. Compilation engagements D. Tax consulting engagements “Courage is the most important of all the virtues, because without courage you can't practice any other virtue consistently. You can practice any virtue erratically, but nothing consistently without courage.” — Maya Angelou End of Chapter page 36 )